Category Archives: Debt

Here’s how the credit card companies work. If you are a freshman you will undoubtedly be a target so pay attention.

Every year the college campuses are canvased from Dorm to quad with those fold out party tables, you know the ones, those long fake wood finish ones you’ve played beer pong on for years now. On them are credit card applications and “free gifts” just for filling them out! no sir, you don’t even have to be approved and we will give you this frisby or if you prefer an energy sports drink!

You walk through campus and feel like an adult for the first time in a long time. You did it man, you’re there and now you are an adult. No parents, no rules. Some hot blonde walks up to you and asks for a moment of your time. With chin on floor you drool as she explains the program to your now vacant mind.They play off what you’re feeling, cause let me tell you that you feel the same way everyone else did their freshman year and she knows it. <That’s called taking advantage 😉 > So you fill out out this short form, take your plastic disc and go on your way. Dude, she was so into me.

Then it comes. Your first credit card. A little plastic ticket to the world. Your parents always told you “you need to use credit to build credit”, and so you do. You figure that a few red bulls or a new Laptop will help your education, so you make a few purchases $5 for a latte, $30 to fill your I pod…oh crap…latte stain on the jeans, well I needed a new pair anyhow.

8 weeks later you get the bill and have an aufully hard time figureing out how you spent $600 in a month when you swore you would only use it for emergencies and then “pay it right off”. Well,you don’t have $600 to send them and the minimum payment is only $35……cool I’ll send the$35 now and pay it back in the next month or two.

You been scammed sucka.

Here is the truth behind credit. You don’t NEED it. It is in fact a usefull tool and no matter what I say you are going to sign up for a card, that’s just how it is. So take these precautions when you do:

1- Leave it at home. Why? If you don’t bring it with you unless you need it for a specific reason like say to pay your tuition, buy a school book or make a payment that REQUIRES you to use it, you don’t let those $5 purchases add up. You got into college, I’m pretty sure you can scrape up $5 for a coffee.

2- Register your card online. Why? You can go to the website on the back of the card and sign up. This will let you pay your bill online in case you forget to mail it out. Which you will.

3- Leave your check book with your card. Why? Stop asking questions and let me explain! When you use your card, immediatly write a check for that amount and send it out. This way your card is always paid on time, no late fees, no negative credit reports. If you pay online, keep it by your computer and do the same thing.

4- Understand interest. It does’nt seem like much, but it adds up very quickly and can multiply overnight. You take an average of 70 years to pay off each purchase if you make minumum payments and overpay by thousands of times! Do you want to pay $2300.00 for a doughnut? Did’nt think so.

5- Learn about finance. This should really be #1 on the list. If your school offers courses, take them. If not, use the internet and read up. If not, have fun with your cash while it’s there, cause it won’t be for long.

Time for part 2 of our getting out of debt series, paying back your debts. As I said in the previous post, there is no magic pill for fixing your financial situation, you actually have to payback all those bills. Don’t fret, it’s not as hard as it sounds, let’s grab our worksheet we created last time and get started.

Now there’s no real right or wrong here on what to do. Some may say pay down the highest interest rates first because they charge you the most in fees each month, others will say pay the smallest debts first to get rid of them and then there’s the guy in the back yelling Bankruptcy! again and again. Once again, I’ll illustrate how I personally did it, and why.

First you need to establish your goal in this step. Do you want to get out of debt as fast as possible or do you want to conserve as much money as you can while doing it? Lets start with the one that most of the pros like, keeping your money.

Get all of your billing statements. Now take a look at the finance charges for this month. Write them down on a sheet of paper in order from least to most. Do the same for your monthly payments in a neat little column right next to it. Now you can kind of see how bad your interest rate really is. In one case I had a minimum payment of $220 a month, of which $196 was finance charges. That meant that for the $220 I gave them every month, my debt was reduced by $24 and that was at an interest rate of 25%. Seems a little more than 25 to me, but I’m no mathematician.
What I want you to do now is take a look at your finance charges compared to your monthly payments. See where the biggest loss of money is occurring and we’re going to call that Priority one. From this point on, this is your biggest enemy. This is some guy, reaching into your pocket while you sleep and taking money from you. Let’s put an end to him shall we? Finish your list of targets by writing under Priority one the next biggest offenders until you have them all listed and move on to the next section.
Break out the check book(or online bill pay if you were smart enough to listen to my previous posts). Write out the minimum payments to every other debt beside priority one. Now go to your worksheet and see how much disposable income you have. Come up with a number that you can be comfortable with not having in your account this month, the higher the better. Take that number and write it down for priority one, cause that’s how much you’re sending him right now. The more money past the minimum that you send, the faster the debt will disappear. Be sure to look for a check box somewhere on the bill to tell them that any money you send past the minimum is applied to your principle and not to further the payments along, or prepay interest otherwise, you’re kind of just sending them free money.
I’m sure you’ve seen the old Warner Brothers cartoons. Bugs Bunny drops a pea sized snowball down off the top of a large hill and as it rolls down to it’s inevitable meeting with Elmer Fudd’s melon shaped head, it grows larger and larger until that once pea sized snowball is the size of Texas. Good stuff I know, but the point here is that you understand the “Snowball effect”. This is the tool that will get you out of debt faster than paying minimums ever will.
Now that you’re sending money to Priority one at a rate faster than they can charge you interest, it WILL be paid off much sooner than they would like. When it’s paid off, you can now add the minimum payment from this bill to your disposable income every month as you change the balance to read $0.00. If you were sending P1 $100 a month and you have three other bills that require $50, when P1 is gone, you can start sending $150 to the next guy which is 3X the minimum. When that is paid off, you can start sending $200 to the next one, which is 4X the minimum. Each debt that you pay off, the snowball gets bigger before it hits the next debt, so each debt is paid off that much faster and easier that the one before it.

If however you want to pay them off as fast as possible as I did and have no reguard for the amount of money lost over time, here’s how I did it. I listed my balances and interest rates next to each other as in the other example. I called all of my credit card companies and asked for balance transfers from the higher rate cards to the lower ones. I emptied every penny I could from the highest interest rate card and then paid off the balance that month. After my balance was $0.00, I called that high rate card and demanded my rates be cut if they expected me to stay with their card, since the power was all mine at this point(because I owed them nothing)they agreed and lowered my rate from 28.99% to 10.99%. Then I transferred the debts back from the next highest rate card to the now lowest rate and did the same thing to them. Now understand, a balance transfer can cost you up to $50 or more to do, but in my case, the amount of money I was going to save from the horrific interest rates I had was worth it. In the end I condensed my debts from 6 credit cards down to 4 and all at better interest rates. It cost me about $100 in transfer fees, because luckily some of my cards offered free balance transfers at the time. So at day one my monthly payments were reduced by over $80 that now became a part of my Snowball.

After the maneuvering phase, I moved on to paying. I simply took the smallest balance I had, and paid it off first, with the help of my Snowball of course. Month after month, I saved and skimped everyday to build that Ball O’ Snow in to something huge and used it to crush my debts with in a years time. Now, I still have a personal loan, and my wife has a student loan, but those too are well on their way to being buried by this avalanche that we started a year ago. As it stands, all of our credit cards are 100% empty, we have only the two very easy to manage loans left, all of our utilities and monthly bills are paid for us, for free, by our bank every month and we have an emergency fund put away that is 4X our monthly expenses. Although I still try to live a frugal lifestyle for the most part, I don’t have to worry about the creditors attacking me, calling me, suing me or anything else’ing me and I can go ahead and make that occasional purchase to make myself happy, in fact right now I’m looking for a new laptop, because I can. That’s life without stress over money. It isn’t too difficult, and you feel the relief way before your balances hit zero.

A few credit cards, a loan or two, maybe even old hospital bills. We all have debts at some point or another, some good and some very, very bad.
Debt causes stress, anxiety, insomnia and countless other mental and physical problems to people everyday. I know this to be true, because I used to be one of them. I spent my days worked up over how much money I owe and how no matter how much I give them the balances just never seem to go down. I though that I was going to spend the rest of my life living paycheck to paycheck until the inevitable day comes where I can’t work due to an injury or illness, or even retirement, and it would all come crashing down on me.

Those days are over.

It can be done, and it doesn’t take buying into a system or paying a credit councilor or avoiding your obligations. Let’s get this clear right now, NO ONE IS GOING TO HELP YOU. You have to do it on your own. The only way to do it is to research and learn. As Robert kiyosaki puts it, increase your “Financial IQ”. I’ll outline a simple method to start controlling and systematically eliminating your debts.

You need to start with a list. Get a piece of paper and a pen, go ahead I’ll wait. Back? ok good.
Start by rounding up all of your bills. All of your monthly obligations like credit cards, loans, utility bills and anything else you owe to anyone, anywhere, from anytime.

Now list them on the paper in groups. Start with credit cards, then loans etc.. until they are all listed. Add next to each, the following information if applicable:

Total balance

Monthly payment

Interest rate or APY

Due date

Now add the numbers up to find out:

How much you owe overall

How much you pay out every month total

Now you know exactly where you stand with debts. At this point you may be a little overwhelmed. Don’t be. At this step I owed over $40,000.00, which was a bit more than I expected. But As you continue you will see how this will be paid off, and the initial shock of what you really owe will fade.

You need to know the difference between an Expense and a Liability. For your personal needs, consider an Expense to be any amount of money you have to pay out each month to maintain your lifestyle. These include rent or mortgage payments, utilities, car insurance, food and entertainment(yes, you have to add it up).
A Liability is something that you owe, things that can’t be canceled or given up. In other words you have no choice but to pay it. Under this category you should add things like credit cards, personal and student loans and past due bills for services you no longer receive like hospital bills or that pesky BMG music service that just keeps billing you for crap you never wanted anyway. Notice, although a mortgage is a loan, and a big one at that, it goes under Expense and not here.

Now take your newly created list and turn it into a newly created worksheet. Separate the Expenses from the liabilities and put them In two side by side columns along with the interest rates, dues dates, monthly payments and balances. Add the amounts of your Expenses and write the total below them. That’s how much money it costs you to live each month. Now do the same on the Liabilities side. You now have a total amount of debt owed, and how much that debt is costing you a month. Further down the page, add the monthly columns together and label it “Total Expenses”, we will come back to that later.

Let’s talk about the money coming to you instead of away for a second, I’m speaking of course of Income and assets. Income is the money you make from a job. Yeah I know I’m not telling you anything new there, but the reason you need to know that is to differentiate Income from your assets. Assets are things that produce money, without you having to be around. Rental properties, Stocks, Bonds, companies you own, intellectual rights, Interest bearing accounts, annuities….you get the picture. This is money coming in to you each month that you don’t really have to ask for, it just comes.

Get a new piece of paper, because you are going to create a list now of all of your Income and your Assets just as you did before for your Expenses and Liabilities. Add your Income from your Job(s) on one side, your assets on the other and get your totals down to the bottom of the page and label it “Total Income”. You should now know how much money you make every month and what your total assets are.

Time for the big picture. Take Your “Total Income” and bring it to the first page. Slap it right on top of your “Total Expenses” and do the math. Label that new number the “Difference”.

Now you have the clearest idea of your finances you’ve ever had right? You know how much money is coming in, going out and where and when it does. That’s it for todays exercise. Next I’ll show you what to do with your new found Information, until then Go read a book.

The first and easiest thing anyone can do to take control of their own money is take a look at your bank accounts. More specifically, the rate and fee structures of said bank. Banks are a business, pure and simple. They are there to make money, off of you, by holding your money and lending it out. But most banks nowadays make a killing off of charging YOU fees every chance they get. Need to take money from an ATM? $1.50 please. Accidentally write a check for $5.00 when you had $4.98 in your account? “Sure we’ll pay the 2 cents for you…..that’ll be $30.00 please.”
Learn how much your bank charges you and for what. If you don’t know, you can sit down with a personal banker next time you are there and ask them to explain your accounts to you. If you happen to save all your paperwork like some of us do, simply go back and dig it out, it’s a good read and can save you a ton in fees.

Here are just a few examples of your money going into your banks’ pocket:

-ATM fees- You pay the ATM owners fee of anywhere from$1.00 – $3.00 or more, but your bank may charge you a fee on their end matching or even beating(higher than) the original fee!

-Overdraft fees- Every bank charges overdraft fees and it’s up to you to know how much. One of my now former banks used to charge $35.00 for overdrafts, even if it was only $0.02 as in the above example.

-Account maintenance fees- What are they maintaining? never mind, I don’t want to know, but many banks charge you fees every month just to have your account open! I was charged $5.00 a month for an account I rarely used! There are plenty of banks that charge NOTHING, find one and use it.

In my experience credit unions are the way to go. My current account earns over 1% when the old ones never payed more then 0.1%. The Maximum overdraft fee is $2.50. There are NO maintenance fees and they offer free online banking with bill pay services.

Great banks are out there, take an hour to do research and you save yourself countless dollars in the long haul.